>> rose: welcome to the broadcast. tonight we look at the growing concern about the u.s. budget deficit with roger altman, form deputy treasury secretary during the clinton administration and a wall street veteran. >> it's the most serious and fascinating fiscal policy challenge i've ever seen. and it's been 41 years since i started in finance and i served twice in the treasury, which was a great privilege and i've never seen a challenge like this, because as you just said, at one level, the economy's going to be extraordinarily weak and stimulus is necessary. indeed, the argument in the last few days has been do we need a "second stimulus"? but at another level as the deficits emerge-- and they haven't really zuck in on main street yet-- but as they emerge and people see how large they are, the public i believe will

view them as unacceptable. this is already evident in the polls. and the administration will be in a vice. we should be pursuing stimulus and we should keep that going, say, for two more years. and we should wait-- as the president said in your clip-- to confront the deficit until the economy is stronger. that's right. n theory. the question is whether it will be possible in practice and i think that's a tough one. >> rose: altman for the hour next.

captioning sponsored by rose communications from our studios in new york city, this is charlie rose. >> rose: we talk about the economy this evening, the growing u.s. budget deficit has alarm misdemeanor in washington, many on wall street, and many across america. economists warn that rising debt levels could be destabilize the dollar and bankrupt safety net programs like social security and medicare. the obama administration has vowed to address the problem once the economy stabilizes. in a recent interview with al hunt of bloomberg news, the president said the government's debt burden was a top concern. >> i am concerned about the long-term issue of our structural deficit and our long-term debt. because if we don't get a handle on that, then there's no doubt that at some point-- whether

it's the chinese, the koreans, the japanese, whoever else has been snatching up treasuries-- are going to decide that this is too much of a risk. and so that's why it's so important for us to get a handle on our long-term structural deficit. and the key to that-- as i've been discussing over the last several weeks-- is health care reform. that's the single biggest driver of our federal deficit. >> rose: joining me now is roger at map. he served as deputy treasury secretary during the clinton administration. last week he wrote an op-ed in the urinal warning that government will soon need to raise taxes to address the deficit. i am pleased to have him back at this table. welcome. >> rose: >> thank you, charlie. >> rose: here's what you said in this article in the "wall street journal," twooun. "only five months after inauguration day the focus of washington's economic and domestic policy is already shifting. this reflects the emergence of much larger budget deficits than anybody expected, indeed,

federal deficits may average a stunning $1 trillion annually over the next ten years." a trillion annually over the next ten years. this worsened outlook is stirring unease on main street and beginning to reorder priorities for barack obama and the democratic congressional leadership. by 010, reducing the deficit will become their primary focus. and then you end this by saying "this challenge may be the toughest one mr. obama faces in his first term. fortunately, the new president is enormously gifted. that's important because it is no longer a matter of whether tax revenues must increase but how." i continue in an e-mail exchange between you and me. "the administration is just in a nearly impossible situation. growth as i argued in that piece is going to be distinctly subnormal for 2010 and 2011. at the same time, the deficit outlook will emerge as much worse. at one level, you can't withdraw stimulus, i.e., pursue deficit

reduction, when the economy is so weak. but at another, the public and financial markets will be rebelled over one trillion dollar deficits as far as the eye can see. this will be gettys brg for obama. hopefully he's in a blue uniform but who knows?" strong language. a huge problem. >> it is. it's the most serious and fascinating fiscal policy challenge i've ever seen and it's been 41 years since i started in finance and i served twice in the treasury, which was a great privilege, and i've never seen a challenge like this. because, as you just said, at one level the economy's going to be extraordinarily weak and stimulus is necessary. indeed, the argument in the last few days has been "do we need a second stimulus?" but at another level, as the deficits emerge-- and they haven't really sunk in on main

street yet, but as they emerge and people see how large they are, the public, i believe, will view them as unacceptable. and this is already evident in the polls. and the administration will be in a vice. we should be pursuing stimulus and we should keep that going, say, for two more years. and we should wait-- as the president said in your clip-- to confront the deficit until the economy is stronger. that's right in theory. the question is whether it will be possible in practice. and i think that's a really tough one. >> rose: if they do that. if they say "postpone." we're going to have a new stimulus... some argue without a new stimulus we're going to have a dig bepresentation. i was told that today. paul krugman argues that point about needing a new stimulus. n this program last week. what happens if they do that? >> the question in the context of our discussion here would be whether the financial markets...

but even more so main street would accept even bigger deficits which such a second stimulus by definition would cause. because a second stimulus would mean a combination of more spending and more tax cuts and therefore bigger deficits. >> rose: give me a short primer on deficits. >> well, first of all, we've never seen deficits of this magnitude either in absolute terms-- just the dollar amount of the deficit-- or in relative terms, the size of the deficit to our economy and the growing relationship of the debt as it grows by virtue of these deficits. never seen these before in your lifetime or my lifetime. so for example the deficit for the year we're now in is going to be about a trillion nine. a trillion nine. >> rose: over 2009 the deficit will be $1.9 trillion? >> that's right. and keep in mind, only a few years ago, four or five years ago, the entire budget wasn't

$1.9 trillion. it would have been, say, five years ago or six years ago. the deficit in relation to the size of our economy is going to be 13% this year. it's not going to... it's going to average approximately 5% for the next ten years. and, by the way, we've only had deficitss of that magnitude, the 5%, twice since 1946. now, the debt, according, for example, to goldman sachs, is going to reach at the end of this ten-year period about 85% of the size of our economy. now, the last time that happened was at the onset of world war ii 1942, 1943. we haven't had anything remotely like that, since. the united kingdom, the u.k., is also facing an outlook like that and has recently been warned by the rating agencies that it will perhaps lose its credit ratings if the debt gets to that size. >> rose: what is it now?

the debt as a percentage of our g.d.p. for this year. >> it's about 40%. >> rose: okay. so double. >> and the administration said-- and i think quite correctly and admirably in the so-called budget blueprint it released just as president obama took office-- that we as a nation needed to stabilize our deficit at 3% of g.d.p. and stabilize our debt of not higher than% of g.d.p.. that's the administration's own view and they're correct about it, to their credit. so the problem is, we're facing a much worse outlook than that. the question is why are we facing that outlook? and the answer essentially is that we're looking at a much weaker economic recovery than any of us would like and it's so much weaker that revenues will fall short of expectations, interest expense will be higher than therefore deficits will be a lot bigger. a lot bigger. so, for example, the administration at the moment is officially estimating that growth next year will be 3.2%,

so called real growth. and the following year 4%. but goldman sachs, for example, is estimateding, and many others-- i would agree with them-- but goldman sachs is estimated 1.% for next year and about% for 2011. so about half the cumulative growth rate which the administration is estimating. now i know the administration is going to lower its forecast, it has to and it's been saying so privately. >> rose: lowering them to the goldman sachs numbers? >> i wouldn't say that far, but they'll lower them. the problem is, though, charlie, and the difference from the day president barack obama took office is the outlook for recovery is very weak, there are a lot of reasons for that, we could talk about it if you'd like. and that weaker recovery spells much bigger deficits and this is the problem. >> rose: okay, there's also the problem of what the president wants to do in terms of health care and energy. and he's getting a chorus of people now who are saying to him "you're trying to do too much at one time." and others are saying "because of the increasing debt and

because of the need to pay attention to the economic recovery, you need to slow down in terms of what you're doing." are they right on that question? >> not necessarily. no. because a number of the initiatives which the president has put forward-- let's say energy-- actually would lower the deficit because one of the components of the energy bill is the cap and trade portion of it, which is the biggest portion of it and that would actually raise revenue. so not all the president's initiatives expand the deficit. and, in fact, as i point out in that piece, it's quite telling that the president's rhetoric over the past three months on health care has shifted. it was three months ago focused on the universality of coverage, which we need, the public option we need. and it's not that he's abandoned those, quite the contrary, but today his focus if you listen carefully is a deficit neutral health care bill.

that's because the separation is keenly aware of the change in the deficit outlook and the challenge it's facing. >> rose: to have a deficit-neutral health care bill what would he have to do to change in terms of his original proposals? >> well, to their credit, they originally... they've always said that the bill should be deficit neutral. it's just that when the campaign for health care really began, that was not one of the first things that was out of anyone's mouth. and, by the way, had been serving there i would have pursued it the way they did. now that the deficit outlook has become clearer to them-- and i want to emphasize, they're keenly aware of this-- they've been stressing above all the deficit... necessity for deficit neutral tichlt in other words, they've always been in that place but they've said this is paramount. one of the reasons that the bill is proving to be a great struggle, although i believe ultimately they'll get one, is because paying for it under the congressional budget office scoring system you're familiar with so that it's certifiably paid for is proving difficult. because this is going to cost

approximately $1 trillion over ten years and finding that amount of financing, which can only be reducing spending below levels that otherwise would occur or raising revenues, the combination has to be $1.trillion over ten years, finding that is proving to be very tough. >> rose: do they recognize the problem as it exists? do they, for example, believe that the recovery is not what they hoped and expected it to be at this time? >> yes. they do. >> rose: what else is contributing to the deficit? >> in president obama's defense, the congressional budget office analyzed the various factors that contribute to the deficit. and their conclusion was that only about 15% of these deficits we're talking about are attributable to obama initiatives. to steps he's taken since becoming president. the other 85%, in other words, reflects the economic condition

which he inherited, the very sharp burst, it's really a burst of spending that we saw under president bush. parenthetically federal spending rose two and a half times under george w. bush than it did under bill clinton. most people don't realize that, but it did. and, of course, the intergenerational problem, the aging of america, the fact that the deficits and the medicare trust fund, the actuarial deficits and to a much lesser extent social security are now coming closer. they're inside the ten-year window in a couple cases. >> rose: when the baby boomers have access to those demands. >> the problem is primarily medicare not social security, but yes. >> rose: so what are the choices for the president? >> well, there's.... >> rose: if he recognizes the danger of deficits at that extreme level, the debt 89% after ten years of the g.d.p. >> well, first he said in your clip-- and he didn't use a statistic-- but he said in effect that outlook would not be acceptable. and i think that's correct and

it's also... makes clear that at some relatively near term moment the administration is going to have to confront the deficit outlook and put together a deficit reduction package. now al hunt, who did that interview with the president and i had a debate, a private discussion the other day and he read my piece and he said "you're dead wrong on when they will do that. they couldn't possibly do that as early as next year because the economy will be too weak. the congressional elections will be approaching" and so forth and so on. they would have to do it later. so there will be a gate debate over when to confront it and a great debate, charlie, over exactly how to confront it. but as i said in the piece, there's really no debate inside the administration about whether they will have to do it. >> rose: so they have the do it. the question is time and method. right. >> rose: all right. so you say they've got to do it earlier, al says they can't do it because of political considerations and you say if

they don't do it now, the consequences are? >> no. let me just put that in context. the question i was addressing is when they will be forced to do it. >> rose: oh. >> and that comes down to two things: main street, public opinion, and financial markets. and i was suggesting that some combination of the grass-roots reaction to these enormous deficits and the financial markets reaction may-- i can't be sure-- force their hand sooner than they would otherwise like. i hope not. >> rose: i'll get to the choices in a moment but i want to make sure we understand that. is main street going to react to a deficit? is that what has happened or will the markets react and main street will be frightened by the reaction of the market? is that the way it will happen? >> i was particularly fascinated by the last two really major

polls. the cbs/"new york times" poll and the "wall street journal"/nbc poll. each released two weeks ago and they both asked about the deficit. i thought it was quite surprising that the public registered already-- before having seen the outlines of these much worse deficits-- twice as much concern about the deficit as, for example, health care. and for the last three or four years, health care on the domestic ledger has been number one. so already the public is saying by a two to one margin "we're more worried about the deficit than we are about health care." now, ask yourself a year from now when the deficit outlook that we're discussing here becomes the universal view what the public reaction will be. i suspect it will be considerably more adverse than we saw in last month's poll and there will be a lot of pressure on the congress, for example, on the president and so forth, to do something about it. and this is the conundrum you discussed at the beginning. the economy will be weak and in macroeconomic theory one should not withdraw stimulus at a time when the economy is that weak. but the public may be and/or the

financial markets may be demanding it. and how will they handle that? that's why i say it's... the political equivalent of gettysburg. >> rose: i'll come back to that point in terms of what they can do in terms of the political equivalent. but is there nothing the administration can do to make the economic recovery faster? >> relatively little. >> rose: do they recognize that? >> well, as we discussed a minute ago, there's a debate that's broken out in the last really 48 to 7 hours about a second stimulus. we had a roughly $800 billion, $787 billion stimulus passed, as we well know, in the early days of this administration. relatively little of it has been spent or so far or injected into the bloodstream of the economy yet. so a lot of it has to pay out but already a debate has broken out as to whether we need a second stimulus, meaning another round of tax cuts and/or spending increasing say early next year. paul krugman, who you had on your show, is arguing that.

it's mainstream economics in terms of what you would normally do. >> rose: spend money in a time of crisis. >> yes. and the question will be whether more stimulus-- which by definition makes the deficit even bigger-- would be acceptable to main street. i noticed the republicans are already saying you could never do that and a lot of others, david brooks, for example, arguing that the first priority has to be to get our fiscal house in order and not to do that and so forth. whether the public would accept that and whether the financial markets would accept that, i don't know the answer to that but it seems it's up in the air. >> rose: a stimulus program, that's the only option they have to try to... >> that's the only option the administration has. now the biggest player when it comes to stimulus is not the executive branch, it's the fed. >> rose: right. >> on monetary policy, which is a much more powerful tool. so, of course, one thing that washington as a whole could do-- just that the administration wouldn't be doing it-- would be to pursue the extraordinarily

accommodative monetary policy we're now seeing for a longer period than they otherwise would do. that would be something that washington could do to provide additional stimulus. but it would come from the fed, not the administration. >> rose: what do we know about bernanke's ideas about that? >> well, i would expect the federal reserve in the face of an economic outlook that we're talking about here to keep interest rates as low as they are now for a longer period of time than they otherwise would do if the economy were showing the kind of strength that the administration hoped. >> rose: do you expect the federal reserve to look at this crisis and say "we have got to change, we've got to do this"? >> they're at maximum accommodation now. short-term interest rates are approximately zero. >> rose: so we've run out of monetary policy? >> we could have a technical debate about things like quantitative easing but essentially we're now at maximum accommodation. but you can stay there. you me, pedal to the metal longer if you think you need to for reasons of economic

weakness. and the fed, in other words, may prove to be the more important participant, as usually it does, than the administration and the congress when it comes to what can you do now. >> rose: all right. this is what david brooks said. "and the irony is that obama supporters will be confronted by the problem for which they have the least experience and for which they are the least prepared, the problem of scarcity. raised in prosperity, favored by genetics, these young merocrats will have the demands on the nation's wealth outstrip supply. they will grapple with the growing burdens of an aging society, rising health care costs and high energy prices. they will have to make up for the trillion plus dollars the government will spend to avoid a deep recession. they will have to struggle to keep their promises to cut taxes create an energy revolution, pass an expensive health care plan and all the rest." david brooks. do you agree with that. >> i do largely agree with that, yes. >> rose: so now what... beyond

monetary policy, keeping health care as deficit neutral, looking at some benefits from climate control policy, what else is there to do to raise revenues? to reduce the possibility of an overwhelming deficit? >> here is one possible scenario beyond what we discussed already. if they achieve a health care bill, and i think after quite a struggle, especially a bloody one at the end, they will, then they could follow that up.... >> rose: 60 democrats on the senate side. >> then they could follow that up with an effort to address social security. peter orszag, the budget director hinted at this in an op-ed piece he wrote in the "financial times" a couple weeks ago and jerry sibe wrote about this in the "wall street journal" this morning. and even though social security is a relatively small part of the long-term deficit problem, it's a very important part symbolically. and if the administration were to follow up health care-- which

would be quite a big victory and triumphal moment-- use that momentum to get a social security deal, which would be tough but possibly doable, that would build confidence in their ability to deal effectively with the deficit over the longer term even if the actual impact of social security deal would be moderate, not enormous as it relates to the deficit. that's what i believe is being considered. i don't know if they'll do it. it's being considered. so that would be another step. >> rose: so they're looking at health care euphoria giving them increased leverage to deal with the deficit in a way that will be unpalatable otherwise? >> well, we've all seen that over the past... since the greenspan commission of '83, so all that time, it's proved... a social security solution has proved elusive. president bush tried that and every president in recent times has said "we have to deal with this." so, yes it's proved elusive and perhaps this is the moment when that could be achieved. that would be quite an accomplishment and very important step. it wouldn't solve the entire

budget problem, it wouldn't make the deficit suddenly acceptable and find but it would be an important step. >> rose: and wouldn't have anything to do with privatization of social security. which is what the previous president was committed to... >> they wouldn't go that way. >> rose: so what are the options? >> well, "the ultimate red sox show" matly there's going to have to be a deficit reduction package. if you want to think back, for example, to the andrews air force base summit, budget summit of i believe 1991. we'll have something like that. and a deficit reduction package by definition has to include a combination... it's either all spending.... >> rose: spending cuts and taxes. >> or a combination. it would end up being a combination. you can't do it all on the revenue side or the spending time. >> rose: is it hard to say the words "raise taxes." >> not if you're in the private sector, no it's not. (laughs) >> rose: is it hard for them? they say they'll raise taxes for people over $250,000 and they also say they're going to increase... continue the bush tax cuts and increase the tax cuts for the middle-class.

that's what they say. can they do that? >> well, of course, for them at this moment they have so many immediate priorities, health care first. get the energy bill passed. possibly do social security. let alone the international agenda the president is going with right now with russia and so forth. nobody wants to address the deficit and i wouldn't recommend it either in 2009. we're only halfway through 2009. so they shouldn't be talking about raising taxes right now. it compromising their near-term agenda. they shouldn't inject that into the health care debate if you're rahm emanuel or.... >> rose: okay. but therefore they're not going to address this until after the congressional elections in 2010. >> possibly, sure. if they can stave off or hold back the pressures i referred to from main street, financial markets or both, yes. >> rose: that's the smart thing to do if they can withstand the pressure. >> that's right. yes. >> rose: because it's politically deadly to subject we

need new taxes to reduce the deficit. >> i don't know about deadly but it's pretty hard. >> rose: and your take on this president and this administration is that they would not be prepared to do it? >> no. i believe we will see new revenue or higher taxes, it's just a question of when. >> rose: i understand that. but you're suggesting that politically they're not prepared to think about raising taxes until after the congressional election of 2010. >> as long as the pressures don't become irresistible i think they won't want to address this, nor should they. >> rose: do you think the pressure will become irresistible and that's when gettysburg is here? >> i don't know the answer to that, charlie. but if you step back and take a wider perspective, whether this is addressed in 2011 or whether it's addressed in 2010-- and i think this is the fundamental choice-- it's going to be tough and brutal and the primary

challenge am-- this is my point-- of the first term of president obama's. >> rose: the primary challenge. you made that very clear and i made that clear. let's take you beyond the congressional elections. let's take you into 2011. >> all right. >> rose: the president says "roger, i know you supported hillary clinton but i respect your views and i've been reading the "wall street journal" and the way you expressed them and watching you on television. forget my political life. tell me the right thing to do looking at the deficit that i face. what is it?" timing is no longer a question. it is what? >> well, first, the problem is so large that it's going to have to be dealt with partly on the spending side and partly on the revenue or tax side. not just one or the other. >> rose: where's the spending you want to cut? >> well, we have a really big budget, charlie, $3.6 trillion

this year. and i know that in recent years in washington no one has cut anything. and as i said a moment ago, spending exploded under president bush. but if you have to, for example, freeze spending, we've had those before, you can do it. now, of course, you wouldn't freeze every last dime of your spending, you wouldn't necessarily freeze social security payments or medicare payments and so forth but if you wanted to freeze spending across half the budget or 60% of the budget in an emergency, you can do it. now, that saves a lot of money because savings, you know, in this lexicon, refer to money you would otherwise spend that now you won't. in other words, spending is always projected to grow. so savings reflects spending less than you were going to spend, not necessarily cutting the program from 10 to 9 or 10 to 8. so remember that, it's important. so if you freeze spending, you save money because otherwise it was going to grow. and so a freeze-- which we've resorted to from time to time in american history-- is one way to address spending. >> rose: okay. on the revenue side. what kind of tax would you

propose in 2011. >> well, there aren't a lot of... there's not a long menu of choices. and i said in that piece that i thought for the first time at least in memory we might see a serious debate-- i'm not here to recommend it, i'm not sure it's the right step-- but a serious debate over a value-added tax. >> rose: but you don't believe in it enough to recommend it or.... >> no, no. value-added taxes mean different things to different people. for example, there are some interesting proposals that have been made, professor grets at yale, michael grets, has made some of them on how to structure a value-added tax so that it can be relatively progressive. for example, you take.... >> rose: what is a value-added tax? >> well, there are different versions of them. in some countries in europe, like france, a value-added tax is essentially a national sales tax. in other countries, because remember the term "value-added," you tax, for example, production at its various stages as value is added. so if someone is producing a

piece of original equipment which then goes to some other equipment before it becomes the final product, you would tax it at each stage of production. there are various different types of value added taxes. >> rose: what's the argument against it? >> they're regressive. the simplest version of it is a national sales tax. everyone pays it regardless of income as compared to a progressive tax where the more you make the higher share of it you pay. so any value-added tax you would seriously debate in this country would have to have a big progressive element. as an example, you take... you put one in place, but at the same time you take a large number of lower and middle-income tax roles, taxpayers, out of the income tax system. so they wouldn't be paying income taxes anymore, they'd only be playing value added taxes, state and local taxes, property taxes and so forth. that's one version of a relatively progressive value-added tax. none of them are going to be perfectly progressive and the argue against them is they're not progressive enough. but almost every one of the other really advanced societies

in the world today has a value-added tax. and whether we should have one or not would depend on whether we could structure one to be progressive enough to fit the american way. if we could, i think it's something this which we would have to very seriously explore. the other alternatives in many cases don't raise enough money and in some cases are less palatable. >> rose: if i was president of the united states and i surrounded myself with all these gh powered minds like larry summers and tim geithner, i'd expect them to be thinking about this today and all the eventualitys and to have some opinion on it even though it may be 2011. do you know that kind of discussion, debate, is taking place in this white house? >> to the best of my knowledge it isn't. but the president charged his economic recovery advisory board chaired by paul volcker with addressing "tax reform." and at some point over the next few months, that will get organized and the work will

begin. one alternative is to... that s that when that group comes forward and paul volcker has unique standing to propose various forms of tax reforms, some of which would raise revenue not just be revenue neutral, and that would be one way for this to be evaluated and proposals to come forward other than directly from the white house. >> rose: is the bottom line of this piece that you've written for the "wall street journal" that we've got this huge problem and in the end the only way to cure it is going to be a value-added tax? >> no. the only way to cure it is going to be a combination of spending restraint and new revenues. we could go with a value-added tax. you could obviously go with a surtax on high income earners like me instead of paying 39.6% we pay higher rates than that. you could go with higher capital gains and dividends. >> rose: how would you go from 39.6%, how high? >> well, 39.6% by long-term historical standards in the united states of america is not one of the high income tax rates

we've had. if you look bag over american history, we've had rates higher than that most of the time. now, i don't like to pay higher taxes any more than anybody else and i sure don't like going around saying, gee, it's easy, let's pay higher taxes. it's not easy and not anything you would like to do if you could avoid it. but the solution is going to involve a combination of spending restraint and new revenues. it could be a value added tax, higher capital gains taxes and dividend taxes but we will see more revenue. >> rose: we live in enormously difficult times and everybody is talking about uncharted waters. let me do a little history here. when paul volcker was chairman of the fed during the time of ronald reagan, ronald reagan came into office and he realize head had inflation at a huge level, correct? >> uh-huh. >> rose: and he decided that he would take the pain then in order to deal with... have a better economy four years later.

is that a good idea? >> well, a little historical correction. paul volcker took office as chairman of the federal reserve board in 1979. ronald reagan became president at the beginning of '81. >> rose: right. >> the federal reserve slammed on the brakes, began to inflict the pain well before president reagan took office. to reagan's credit, he realized it was the right medicine. but the fed had already administered the medicine before reagan.... >> rose: but paul vocer is the guy who did it? >> yes. and president reagan understand it was necessary and he had to sit there and take it. fortunately two years later, begining in the fall of '82 it began to work and by the fall of '84 as you remember it was morning in america. >> rose: now turn to the... bill clinton comes to office in 1992, comes into office in january '93. what is it that bob rubin and you did in terms of deficit reduction and the legislation in order to produce, some say, you

know, a rather attractive surplus at the end of eight years and larry summers and others. >> well, there were a whole series of things and everybody knows it's been widely chronicled. let me mention one that hasn't gotten as much attention. president clinton and the congress installed tough budget rules-- two of them-- an authentic pay-as-you-go system meaning pay-go, any time you were to increase spending or cut taxes you had to offset that. >> rose: president obama is favor of that now, isn't he? >> but there are some conditionalitys of that. and the other one was a cap on domestic discretionary spending which couldn't rise above the rate of inflation backed up by what the technocrats call a sequesterment meaning if you allow spending to go above inflation, there's an automatic across-the-board cut. those budget rules were a straight jacket, they really worked and as someone who served at that time, they played a big

role-- not the only role but a dig one-- in producing those surpluses. that's why spending under president clinton rose at 40% under the rate of george w. bush. >> rose: that's why they called you deficit hawks, you and bob rubin and others. so now these two last questions. number one, and then george bush comes in and he has the surplus. he also got a... 2001 and later afghanistan and then later iraq and all those unexpected expenditures and other thins and spent... had a huge spending program. and reduced taxes. >> yes. >> rose: ending up with a huge deficit. >> biggest fiscal swing in the history of the country. >> rose: my question is, just in economic policy, the idea that lowering taxes increases growth and is a good idea all other things being equal. >> well, look, if tax rates are

90%, as we saw, for example, in britain years ago and actually at one point in the united states 50 years ago and you reduce them, you're going to get growth because taxes at that level are stifling growth. they're suffocating growth. if taxes are where they are today, 35% for people like me at the highest rate and you raise them, for example, to 39.6, which president obama is talking about, which we had under president clinton, that's not going to have any suffocating affect on growth. >> rose: but one of the presidents who bought into this idea was jack kennedy, correct? >> yes, that's right. >> rose: what would tax rates... when he came in and said "we're going to lower taxes to increase goat." >> i can't give you the number but they were much higher than today. i want to say the highest rate was 60%. president john f. kennedy, we had tax rates roughly 60%. i'm not saying that was right and we should do it again. but we have to keep in mind tax rates today are not highly loepl

historical standards. they're just not. >> rose: how are they in terms of europe? >> much lower. we rank 24th out of the 28 o.e.c.d. countries in terms of federal revenues as a share of our country. >> rose: the economic recovery, people like paul krugman and others and you hear this noise coming out of the administration we may have a second stimulus bill. you are suggesting that is a bad idea for the present time to create an economic recovery or to add to an economic recovery? >> i'm suggesting that it will be difficult for the american public and the financial markets to accept the deficit consequences of that. if you were to say to me "roger, don't worry about that, don't worry, trust me." >> rose: i can handle the public pressure. >> then a second stimulus fits with traditional macroeconomic theory if, indeed, we see the kind of weak recovery that i believe we will.

i'm not debating whether it's good theory. i'm debating whether in practice it will be acceptable given the enormous deficits we're already facing before you might increase them with a second stimulus. i'm skeptical it would be acceptable. >> rose: when are we going to come out of all this? >> well, there's good news. this economic and financial crisis, i think, in the medium and longer run, will prove to be cathartic. let me give you one example. for many years, the personal savings rate in this country bumped along around zero. zero and 2%. no society is going to continue to increase its standard of living with no savings. it's axiomatic, you can't. savings equal investment, investment equals productivity, productivity equals standards of living. no savings, no investment, so forth. now, because of the crisis, the personal savings rate has shot up. it's 7% now which we haven't seen in years. and clearly because the average american household has lost so much here at a time when it was

so leveraged, the savings rate is going to stay up for quite a while. one optimistic scenario i think has a real shot. it's that we return to a period of better savings. maybe we're not at 10%, but we're... our society turns back to a point where it realize it is virtue of some savings. in the short term, that constrains our recovery, as we just discussed. in the medium and longer term it's positive for getting incomes rising again in this country. i think that may be a very good medium and longer term result of this crisis. >> rose: well, and many people make that point. i mean, the problem is we've been a consumption society rather than a savings society, china has been a savings society rather than a consumption society. they're trying to change in creating a $500 billion stimulus so that they can sell their stuff to their own people rather than selling it to us. >> the savings rate in china is often estimated around 40%. we won't go to that. >> rose: but that's changing, too. they're changing. >> well, they're trying. >> rose: their stimulus program

is working. >> i know, but that doesn't necessarily reduce their savings rate. savings rate is the private savings rate that i'm talking about. in any event? we were to move-- and i think we may well-- into a period where the country in general is saving more than it was. not china's rate, not japan's rate, but more than it was, that would be good for our long-term income growth and standards of living. >> rose: so that's a good thing that may come out of this. what bad is going to come out of it? is something dramatically going to change about standard of living because of this global economic crisis? and could we tip off into a depression as some of the people that you and i both know believe? >> well, my answer to the second one is no. i don't think we're at risk of depression. in fact, i don't think we're at risk of dipping back down to where we were six months ago. >> rose: okay. so the contraction has ended? >> well, the fall... we're not

falling anymore. we've bottomed. for example, the first quarter of this year, general, february, march, we had i think a 6.3% negative growth rate. the quarter which just ended a few days ago is widely seen as having been about a 3% negative growth rate. so we've bottomed and we're starting to move up. the second half of the year is going to be weakened, as i said early in the show. 2010, 2011 going to be much weaker than we would see. are we going to see a depression.... >> rose: but 2010 will be better than 2009? >> it will be growth, just subnormal. i mean, historically, the further you fall, the faster you come back. and we could have a whole other discussion about why that is. but that's been the case historically. unfortunately in this case, that's not going to be true. we have had this extraordinarily sharp fall, worse than the great depression, and for reasons we're talking about here, the recovery rate instead of being a very rapid sharp one, as we've seen historically, is going to be a tepid one, that's the problem.

now, what's the bad news? look, we both saw over the weekend the data in terms of the employment picture. all of the jobs created during this most recent economic upcycle from 2001 through the present have now been lost. we saw that. >> rose: 2001? >> every single job that was created-- which i believe is 6.5 million-- from 2001 through the beginning of this crisis, mid-2010 has now been given back. >> rose: paul krugman says we're going to have in 2010 double digit unemployment? >> everyone agrees on that. >> rose: and that's the primary reason we need to have more government action? >> well, everybody agrees we're going to see double-digit unemployment. we're already at 9.6% and jobs are continuing to fall as we just saw in last thursday's report. >> rose: but unemployment is always a lagging indicator. >> but it's going to get quite high this time and it may not come down until 2011. >> rose: how do you think it might go? not only what you believe, what do the smart people you know believe about how high

unemployment could go? because my argument would be that's when you're going to get a main street reaction. >> well, it's hard to be precise on that. my own view would be in the mid-10s. >> rose: 10.5, 10.6. what about the dollar? what's going to happen to the dollar during all of this? >> well, having served in the treasury twice, i've learned the hazards of commenting on that. even as a private citizen. it's pretty damn hard.... >> rose: believe... >> no, to forecast the dollar. theoretically the dollar should weaken for a whole series of reasons. but, of course, it always has to weaken against something. so, you know, you have to say to yourself, what's the outlook for the dollar and what's the outlook for the euro and is the dollar going to weaken against the euro. i think it's very difficult to know thee theoretically the dollar should weaken and not the least of rich which is the

deficit outlook we face. it should have been weaker in recent months than it has been. so i.... >> rose: why hasn't it? theoretically it should have been weaker than it has been. >> a, the dollar is a safe haven currency in times of fare and real semi panic people move into the dollar. so it's had a safe haven halo around it. second, our current account deficit, the amount we borrow from abroad, actually is going to come down because of the this economic weakness. that's been something that's been putting downward pressure on the dollar and will put less down war pressure on the dollar. third, interest rates have come down around the world as low as ours. so usually on an overnight basis people put money into the currency which pays the highest short-term interest rates, now they're about the same in the advanced countries so there's no benefit to being out of dollar from a short-term return point of view. that's why the dollar has been stable in recent months. but the theories if you had red six months ago or nine months ago would have had it should get weak ye.

>> rose: japan. ebb keeps talking about the japanese example. what was that? >> well, it's in a couple of parts. first of all, beginning in the mid-'80s, japan fell into what turned out to be a very long-lasting recession. what they mean by the japanese example is that their their recession more or less lasted a decade. smup ten years, right. >> and there's a couple reasons why it did. one was unlike the united states they had very difficult time facing up to the condition of their banking system and taking all the losses and taking all the pain quickly. that really isn't the japanese way. we, to our credit, whether it was the savings and loan crisis of the late '80s and early '90s or this crisis today, we're taking the pain in the classic american way, get it over with. we're doing it quickly and i think history will treat the united states and very favorably in terms of how it's resolving this banking crisis. japan let it linger and fester and so forth.

a second thing was in japan, they kept putting in place fiscal stimulus programs but after a while they had repaved every road and rebuilt every bridge and built additional bunker hill bridges in the country and there was little room for actual additional effective stimulus. they'd gone to the well too many times. and then, of course, the very high japanese savings rate, which makes it difficult to have a domestic driven.... >> rose: and what happened to the banking system? >> well, it took actually more than ten years for the japanese banking system to get back to what the regulators and others said was healthy conditions. >> rose: what do you recommend this administration do about... and the financial sector that they haven't done? is it public/private partnership deal, is it going to work? >> i think that's being.... >> rose: evaluated. >> no, it's being deferred. and i don't know whether that will actually take effect or it won't. but i give them high marks because the steps they've taken under the most crushing pressure have been very effective.

let's look at what's happened. there's been an enormous reliquefying of the banking system. a lot of the institution which is initially received tarp money ten of them already have paid it back much earlier than anybody thought possible. and the banking system because of the federal reserve's monetary policy, the fact that banks are borrowing about zero in every performing asset they have which earns them anything makes them a profit, so they're earning a lot of money right now, the banking system is getting healthy at a faster rate than anybody had a right to expect. is it going to be great three months from now? no, we had the worst crisis since the great depression. but they are doing a good job on this. whether the public/private investment partnership happens or doesn't, i think they get high marks. >> rose: and do you give the administration high marks for what it said about executive compensation? >> well, i think if you study what they have said and what they haven't said, what they're talking about is guidelines for boards of directors and so forth and trying to align risk with compensation and so forth. principles that any shareholders

for example-- including you and me-- would support. they're not talking about the federal government determining actual levels of compensation. there's been a lot of rhetoric about it. there's been a lot of misunderstanding. >> rose: not put any ceilings on compensation. >> the administration is not saying let's have the government decide who gets paid what. they're not saying that. >> rose: david brooks, the aforementioned david brooks, also has said in a very interesting column that this administration is different from many, including the one you served in, because it's letting congress write everything. it sort of almost delegated to.... i studied that, yeah. >> rose: that true? and is it good? >> actually, i think the administration is shrewd. they studied carefully some of the mistakes that were made historically, including by the clinton administration. >> rose: you mean health care or.... >> even more broadly than that. and i think they... you watch. on health care, i think here's what's happening. initially the opposite of

president clinton, they set up a senate... sent up to the hill a set of principles. very broad principles and they have allowed the congress to work on trying to turn those principles into precise programmatic directions and figure out ways to pay for it and so forth. but we're getting towards crunch time. and i think administration will be centrally involved in shaping the final bill. i could be wrong. but i think that's how they'll do it. so i don't think that david... i think david suggested that they are just saying "look, pass whatever you can pass, that's great." no, i don't think that's... it's that way. i think people like rahm emanuel and so forth are very astute about this. >> rose: part of the reason i think they're doing it is because rahm emanuel's... you've got the president was a senator, the vice president was a senator, the chief of staff was a leading member of congress and you've got others, you know, who have the understanding of congress. >> my understanding is that the degree of interaction between the congress and the white house is at an all-time high. >> rose: really?

>> yeah. just for the reason you just mentioned. at the people in senior levels of the administration who come straight from the hill, know how to do this. >> rose: they're woking like his deputy chief of staff and those jobs we don't know about. >> that's right. >> rose: pete peterson was here at this table last week and he talked to us, as he has for a long time, about coming t coming burden of entitlements. he also talked about the fact that the chinese hold so much of our debt. is that going to change and are they going to change it? >> a, they're clearly concerned about it, about the concentration risk that they have. b, their options for changing it are relatively few and there's no scenario in which they can change it quickly. there just isn't. >> rose: they'd have to take that money and find another... >> it would be self-defeating. it would be self-defeating to act quickly. therefore, any diversification which the chinese pure sue...

and they will-- will be slow and gradual and the risk that so many people talk about, i think very loosely, you know, the chinese may "dump the dollar" or "flee the dollar." that's misguided. >> rose: because it's not in their interest. >> it's not in their interest and it's not possible to do it. so it's not a good thing for over the long term, as president obama himself said, for china to be... for us to be the consumer and china to be the lender. we have to stop that. but china's not going to make... take self-destructive action and dumping the dollar or quickly trying to exit the dollar would be very self-destructive and they're way too smart for that. >> rose: thank you for coming. >> my pleasure. >> rose: roger altman served in the clinton administration, as i said, an advisor to hillary clinton during her campaign, a principle economic advisor to her. he's been a very successful investment banker and private

equity person, evercorps being the name of his company. but he has always been engaged in the economic conversation of this country. thank you for come canning. we'll see you next time. on the next charlie rose, robert mcnamara in his own words. the former secretary of defense during the vietnam died at age 93. >> two men who i think loved and respected each other, johnson and i, came to the point where i couldn't convince him and he couldn't convince me. and we had to part. now, who took the initiative? i honestly don't know. but i wrote a memorandum in may of '67 and another memorandum on november 1 of '67. >> rose: all about halting bomb >> about halting bombing, turning the military action, in a sense, over to the south vietnamese, reducing u.s. casualties, pressuring the north vietnamese to know,s in order to

try to disengage. and he, i knew, wasn't prepared at that time to accept that. the november one memo i delivered to him by hand. it has a note on it, you can see there. i said "mr. president, i haven't shown this to anybody, not to dean russ, not to the chairman of the joint chiefs, not the national security advisor because i know you may not agree with it. and i won't show it to them until you authorize me to." i never to this day have received an answer. i'm not criticizing johnson. i'm just saying that this was the dilemma we were in. it was an impossible situation. captioning sponsored by rose communications

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